On the Verge of a Pullback

This commentary originally appeared Jan. 10 on Real Money Pro – Click here to learn about this dynamic market information service for active traders.

Light volume indecision has replaced the year-end rally. Let's look first at the chart of the Dow Jones Industrials below. In the past week, nothing has happened. Moreover, the trading ranges have become extremely small, indicating we have encountered very difficult overhead resistance. Notice how much the current action looks like what we were seeing in late July of last year as we again approach those levels.

Also, as in July, MACD is at a high level and about to cross to the minus side. In addition, the Relative Strength Index (RSI), shown at the top, has become overbought and the Absolute Percent Change (APC), at the bottom of the chart, is back to prior levels.

The second chart shows the shorter-term Arms Index moving averages. The five-day moving average is overbought, and the 10-day average offsets an unusually bearish number on Thursday, so it is very likely to become far more overbought. The implication is that we are on the verge of a pullback. There appears to be room for aggressive traders to play the short side here.

(To do my Equivolume charting, as in the charts that appear in this column, I use a charting program called MetaStock. To learn more about this method, read my series of columns, Trading With Equivolume.)

Technology company Sanmina-SCI Corp. (SANM) looks as though it could be ready to take off. The decline from March to September found good support, allowing the building of a wide consolidation that looks like a base. That consolidation, enclosed in an ellipse on the above chart, could easily justify a move to at least the highs of last spring. In recent days, it moved above the prior highs, but with such light volume as to suggest the move is not really under way yet. The stock could pull back again in the next week or two, which would present a nice buying opportunity.

Not only has SandRidge Energy (SD) built a wide base, it also has had a convincing breakout from that base. Volume increased, and so did the trading range, as it went through the prior top of the consolidation two weeks ago. The subsequent light volume pullback was very much to be expected and now strength seems to be resuming. The entire base takes on the appearance of a reverse head-and-shoulders pattern. MACD has gone positive. This stock looks like a buy around current levels.

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